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By Robert Rapier on Oct 12, 2007 with no responses

Answering Questions – Part II

OK, I think this finishes off the questions. Thanks to all who asked a question. I think this has been a productive exercise, and I hope you find my answers useful. I may do this again at some point, but for now, I am back to posting and then lurking.

The Questions

Jeff Sutherland asked: It seems to me that electricity is going to be the key energy source in the future….Biofuels, like ethanol, if produced with electrical equipment seems like a good method to store energy….What do you see as the best option for a transportable form of energy in the future? Answer

garsky asked: A couple of posts ago you mentioned some things you were doing to prepare for a worst-case scenario. How about some details? Especially the part about your savings. Answer

Rob asked: Have you given up hope? Based on your more recent posts, it certainly looks like it. Answer

ape man asked: Take a look at this Bloomberg story. Does the story indicate that there are too many tankers, or that OPEC is not following through with its promised production increase? Answer

Doug asked: What would be an optimal location to live in ten or twenty years from now? Answer

Armchair261 asked: There’s always a lot of press about gasoline prices and inventory levels. How are these inventories affected by demand for other products, like diesel, propane, or fuel oil? Are refiners having trouble meeting demand for those products too, and is this siphoning some crude away from gasoline production? Answer

Chris said: Dr. Ramey has created a new and more efficient method of production which increases the yield of butanol and decreases the number of and volume of byproducts….not all species of high oil yielding algae are perfect but there are plenty to choose from.

Questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with? Answer

anonymous asked: What is the motivation to maintain high gasoline inventories? Answer

mink asked: 1) How do you see the way forward for “peakoilers”? Here and on the oil drum you are interested in getting reliable information and predictions out to the public. But the number of people interested is small.

2) There will come a time when peak-oil will hit public awareness, and it will be an ugly sight. Panic is very possible, and this panic may be very destructive. How do we prevent this? Answer

optimist wrote: Here’s my request: write a posting describing how one might tell if a given technology is promising or not. I think this would be immensely helpful to non-technical readers. Answer

The Answers

Answer

First, I agree that electricity is going to be key. We have the ability to produce much more electricity than we do now, but I don’t think we have the ability to significantly increase our output of liquid fuels. However, I would not produce biofuels from electricity. It would be too inefficient to go that route. For instance, if I had biomass, I wouldn’t convert it into electricity, I would gasify it and convert it into a liquid fuel. The heat produced from the process could be used to produce electricity, but the energy efficiency of the biomass is going to be much higher if you go straight to liquid fuels (if that’s what you intend the final product to be).

As far as the best option, I think electric transport will be the core of our transport system long-term, but we will always have a need for liquid fuels. I think biofuels can fill part of this gap. But we have to get away from this belief that we are going to displace most of our current oil usage with biofuels. That kind of thinking is very dangerous, because it could divert too many resources and waste precious time that could be used on more sustainable long-term solutions. Right now, the government is banking far too much on biofuels as THE solution, when they should be spreading the bets a lot more than they are doing.

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Answer

My strategy is very long-term, and I do not advise anyone else to do what I do. It has worked for me, but it may not work for you. Going all the way back to the early 90′s, I put a lot of thought into a very long-term strategy. I didn’t want to time the market, so I tried to identify sectors that I thought would fare best over a 20-year period. Health care/biotech was one of the sectors that I could see outperforming, especially as the Baby Boomers grew older. People are going to spend money on health care. I still believe that, so I have a fair amount of money in that sector (and have had for many years).

In the late 90′s and early part of this decade, I partially abandoned my long-term strategy and jumped on the tech bandwagon like many others. I got burned like many others. Why did I get burned? Primarily, because I didn’t really understand the things I was investing in, and I was lured by the prospect of the incredible returns that tech stocks were delivering. I joined the flock with the other sheep and got sheared. So, I reevaluated, and decided: Stick to the areas that I really know, and focus on those. I brainstormed on what I thought the future held, and I concluded that higher oil prices looked very likely. But the U.S. is very dependent upon oil, so it appeared to me that the economy in the U.S. is very vulnerable to higher oil prices.

So, these assumptions were the basis of my strategy. I left my position in the chemical industry for a position in the oil industry. I figured that as oil supplies tightened up and the price rose, and people continued to need energy, the people providing that energy would have the greatest job security. To hedge against the dollar, I put about 20% of my portfolio into international funds (this is more than most financial advisors would recommend). I also made a bet that energy stocks were undervalued. More recently, with my position in the UK, I have further insulated myself against the falling dollar because my compensation is now tied to the British Pound.

Following the tech stock fiasco, my strategy since 2001 has paid off. My overall portfolio – which includes the money I have added into it – has increased at an average annual return of 36% for 6 years. If I exclude the savings, the returns alone have averaged 26% for 6 years. I am now in the process of using some of that capital to acquire land in various locations, which will provide further diversification.

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Absolutely not. In fact, I am more hopeful than I have been in some time. I believe I am realistic, in that we are going to have to reduce our energy usage. But I am cautiously optimistic that if things get really tough, we can change in ways that don’t seem likely at the moment. We don’t give ourselves enough credit for our adaptability. If oil did peak soon and the price went a great deal higher, a lot of people would find areas of fat that they could cut out. This sort of behavioral shift would give us added time to formulate a better strategy than counting on biofuels to provide the net equivalent of 40 or 50 million barrels per day of oil.

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Answer

Note that this story dates back to August, well before the OPEC announcement that they would supply more crude. So I wouldn’t read anything into it regarding whether OPEC is following through on their promised increase. In fact, reports so far indicate that Saudi has in fact advised Asian refiners that they will be bumping up deliveries there.

Now, as far as why tanker demand was down in September, I can’t say for sure. Spring and fall are typical turnaround seasons, in which refinery utilization goes down and crude demand follows. So what would be of interest would be to compare the tanker demand rate with the typical September rate, and also to look at the condition of oil inventories in the area. That might clarify the situation.

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Answer

I think it will be safe within the walls of my compound. :-)

Seriously, if you strongly believe in a worst-case scenario, there are certain attributes that I would look for. I want to see a high ratio of farmland to surrounding population. I want to be relatively close to decent medical facilities. I would like to be close to transportation via rail or water. I want the place to have a reliable water supply. Those are just a few of the things that would be on my check-list, and there are some places that fit the bill. I think areas on both coasts of the U.S. will fare well. Needless to say, I think Scotland – which will still produce a lot of oil and gas for a long time – will fare well. I absolutely would not want to live (among others) in Houston, L.A., Phoenix, or Las Vegas (although one could argue that the latter two are well-placed for reliable solar energy).

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Answer

Refiners are always looking at margins on diesel and gasoline. When margins for diesel are higher than for gasoline, they will shift production toward diesel (which will also affect things like the propane balance). A typical refinery can shift between diesel and gasoline to a limited extent – perhaps 5%. If production is shifted toward diesel, then that should eventually improve the gasoline margins as supply is taken off the market, and as this happens they will shift some production back. And they literally look at this and adjust multiple times per week.

The one big caveat is that commitments to existing customers take precedence. So, if margins for diesel look better, but you would have to short an existing gasoline customer to take advantage, you are stuck. You can’t declare force majeure for something like that. Maintaining relationships with your customers sometimes means that you have to give up short-term profits.

Are refiners having trouble meeting demand? Yes. Refinery utilization has been down since Hurricane Katrina, and the only thing that has kept this from resulting in $4 gasoline are strong imports. If the imports dried up, refiners would attempt to maximize gasoline, and this may precipitate a distillate shortage. And we don’t import much in the way of distillates, because demand is high elsewhere in the world (unlike gasoline, which is produced in excess, allowing some to be exported).

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First of all, I certainly don’t want to denigrate Ramey’s patent. It is a good contribution. However, it is clear to me that many people do not understand the real problem with bio-butanol. It is not a problem of conversion rate or reaction speed. Those are the areas that Ramey addressed, and while those things are nice to have, there is a knock-out factor that has not been addressed. That is, if you read Ramey’s patent (which I have done many times), he is still talking about butanol concentrations in the range of 2.5%. That is the problem, not whether the conversion is 25% or 35%.

Butanol is very toxic to the bugs, so it is very difficult to increase the concentration of butanol in the solution. What is needed is a breakthrough that would allow the bugs to thrive at the solubility limit of butanol, which is about 8%. In that case, excess butanol production would phase out, and this would be much less energy intensive than a distillation. But you can’t afford to distill off a 2.5% solution of butanol. The energy inputs into the process will be far greater than the energy content of the butanol. I know this from experience. I have done a lot of work on butanol distillations. At a 3% concentration of butanol, we don’t even attempt to separate it out. Even using relatively cheap (at that time) natural gas, it didn’t make economic sense to extract that butanol. Those levels of butanol are sent to wastewater treatment for disposal.

Believe me, I have a soft spot for butanol. I want to see it work. But right now there are serious issues. That’s not to say that it isn’t worth pursuing. In fact, I am working on it myself. But I have to be realistic.

Now, your specific questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

The collection is the problem. If you go back to first principles of solar insolation, in the absolute best case a square meter of water can produce about a gallon per year of biodiesel. Once you add up the costs and energy inputs to harvest that meter and process the oil, it becomes an exercise in economic futility. Will it ever be economical? I won’t say never. I will say that it is nowhere close.

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

I didn’t write that. It was written by Dr. John Benemann, who was involved in the algal biodiesel work and coauthored the closeout report of the project. He has 30 years of experience in the field, and like me, he likes to reel in hype when it gets out of hand. That’s what he was doing. His reasoning is that the cost of closed bioreactors is far too high – by a couple of orders of magnitude – to justify the amount of biodiesel that you could produce from the process.

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with?

It’s going to take conservation, efficiency, inputs from biofuels, electric transportation, public transportation, etc. There is nothing out there, and nothing on the horizon, that can actually replace our current usage of gasoline and diesel. We have to come to grips with this as soon as possible, and start spreading our bets a bit more. Right now, everyone is counting too heavily on biofuels to deliver.

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Answer

Ideally you only keep inventories where they need to be to make sure that you are always able to supply product to your customers. If you keep inventories too high, you obviously have money tied up that’s not doing anything for you. So let’s say you were maintaining high inventories in 2005. Suddenly, Hurricane Katrina comes along, prices go through the roof, shortages start to crop up, but you are in fat city because you had high inventories. So, it’s a balancing act.

One thing you will see if you look back, is that after Katrina refiners started to keep their crude inventories much higher than before. They saw the effects of a supply disruption, so they played it cautious for a while. Over time, I think we will start to forget, and inventories will creep back into the normal ranges.

Gasoline inventories are a different matter. I think refiners would like to put more product on the market, especially back when margins were so high, but they just couldn’t make enough to satisfy demand and refill the tanks.

One other time that refiners are motivated to keep gasoline inventories high is when they are headed into a turnaround. You need to have very full gasoline tanks when you shut down, so you can supply your customers while you are down.

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This was one of the more difficult questions to answer. You are correct that the number of interested people is small, but that number is growing. I am seeing more references in the media (some of which are merely to denounce those “crackpot Peak Oilers”). It has been very important to me, and to many others who are concerned about future oil supplies, that we maintain credibility as we discuss this. Those who cherry pick data to support preconceived notions, or who merely ignore inconvenient data do a great disservice to us all. (See Stuart Staniford addressing that here).

Arguments must be sound, and criticisms must be addressed. Where matters are open to interpretation, you must make a convincing case for why your interpretation is correct. With a few exceptions, I think that convincing large numbers of people with factual arguments has largely been a dismal failure. To convince the masses, you have to start convincing the media. The more this pops up in the media, the more the rest of the media will pay attention. But if the media is being presented half-baked arguments, it does tremendous damage.

Panic is only going to happen if things change rapidly. Anger is going to be a common emotion as oil prices spiral higher and higher, and people feel that their hard-earned money is flowing into the coffers of OPEC and the oil companies. The thing I have always believed in is educating people, which is the reason I do this. The best we can do is continue to chip away with sound arguments, and hope that the message starts to sink in. If people understand why things are happening, then we should be in better shape with respect to formulating solutions. If we simply blame the usual suspects (it’s those gouging oil companies!), then we may sit around and point fingers as we drive off a cliff.

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If it was that easy, people wouldn’t keep offering me large sums of money to vet technologies for them. Seriously, there seems to be a great big vacuum in this area. I get questions from intelligent people who can look at an energy idea with a major flaw, but they can’t see it.

There is no magic formula. I think it requires experience, and you have to take them on a case by case basis. If someone brought me a potential breakthrough in biotechnology, I would be in the same boat as a lot of people are when they try to interpret the latest hyped energy breakthrough. Even though biotech is an interest/hobby of mine, it may be difficult for me to spot a fatal flaw. A molecular biologist may take one look, and say “You see that step where they say ‘insert gene A into position B?’ Well, the status of the technology is nowhere close to being able to do that.”

I think it just pays to be a skeptic first. There is nothing wrong with being a skeptic, even though many people confuse skepticism with negativity. I always tell people that I am a skeptic, but also a problem-solver. I am not shooting these ideas down for fun; I want some of them to work. But you have to sort the wheat from the chaff.

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